Successful investors in cigarette giant Altria Group (NYSE: MO) have marveled at the way the company has managed to get past difficult situations to produce strong dividends and impressive share-price appreciation over time. Yet many investors still don't have a good sense about the tobacco company's plans for the future. At a recent conference, Altria CFO Billy Gifford talked about Altria's future and how the company intends to make the most of it. Let's take a closer look at some of the things that Gifford had to say about Altria.
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Image source: Altria.
Altria's commitment to shareholders
When you think about Altria at the highest level, we really have two financial goals or objectives that we pursue: First, grow our adjusted diluted earnings per share by 7% to 9% over time; and second, with the cash that produces, return a large portion of that cash back to shareholders in the form of dividends.
One of the reasons why Altria is such a popular stock is that it has always worked hard to share its success with its stakeholders. Even as cigarette smoking has become less popular over the decades, Altria has built up its Marlboro brand into a world-renowned icon of American culture, and the result has been a devoted customer base that has been willing to stick with the brand. Altria's marketing efforts have given it the pricing power to impose increases even in the face of higher taxation from government authorities, and that has been essential in letting the company produce the earnings growth necessary to keep growing its dividend.
How Altria sees its role
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In pursuit of those goals, we follow three strategies. The first is to maximize the core tobacco businesses that we own. The second is to generate new income streams from innovative tobacco products. And the third is to manage those diverse income streams and our strong balance sheet to deliver consistent financial performance.
What many investors don't fully appreciate about Altria is how it has to find a balance between honoring its traditions and embracing change in the industry. Even with all the pressure on the traditional cigarette industry, Altria's smokeable products category still brings in the lion's share of the company's overall revenue and profits. Other segments, including smokeless tobacco and Altria's wine segment, have sometimes been more profitable and enjoyed better growth characteristics, but they're quite small in comparison to the core cigarette business and therefore can't move the needle that much. Altria thus has to embrace cigarettes and find ways to stretch out the income stream from its core products as long as possible.
At the same time, though, Altria has identified innovative new products as potentially changing the industry forever. E-cigarettes and other e-vapor products have gained in popularity, and Altria has made sure it didn't miss the boat by boosting the profile of its Nu Mark subsidiary. Efforts to get Nu Mark's MarkTen products into stores have been successful, and as the product lines gain momentum, Altria hopes that alternative products will play an ever-increasing role in the company's overall financial growth.
Why Altria isn't worried about the Reynolds-Lorillard merger
When you step back from any merger or acquisition, you have to remember: consumers really choose brands in the marketplace. They don't choose the companies that own those brands. So all of these brands were already in the marketplace, and we were already competing against them.
Gifford's view of how Altria has had to respond to Reynolds American's (NYSE: RAI) acquisition of Lorillard provides a fresh perspective for long-term investors to embrace. Some have worried about the ability of Reynolds to extend the reach of Lorillard's Newport brand to pose a new competitive threat, and it's true that Altria has had to deal with Newport in geographical areas in which it formerly didn't face competition. Nevertheless, Altria has a lot of faith in the power of the Marlboro brand, and it believes that Marlboro will be able to sustain its market-share advantages and compete effectively against Newport and other rival brands well into the future.
Moving forward with Altria
Altria also highlighted several other aspects of its business that have given it good results lately. The introduction of Copenhagen Mint has proceeded well, and by using the same general strategy that it did with Copenhagen's Wintergreen product, Altria thinks it can capture even more of the smokeless tobacco space. Between MarkTen XL in the e-vapor space and moves to develop further the iQOS heat-not-burn technology that has seen early success in international markets, Altria has all of its bases covered.
Altria has high hopes for its future. By combining what has worked in the past with what it sees as a new vision for tobacco products, Altria expects that it will keep leading the industry forward and treating shareholders well as a result.
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